On Sep 11, we upgraded steelmaker Nucor Corporation ( NUE) to Neutral. While weakness in its sheet steel business remains a concern, strength across automotive and energy markets should lead to improved results moving ahead.
Why the Upgrade?
Nucor, on Jul 18, posted mixed second-quarter 2013 results with earnings missing the Zacks Consensus Estimate while revenues beating the same. Profit fell year over year on a lower performance in the steel mills segment and a slow recovery in residential construction. Lower selling prices and shipments led to a decline in the top line.
Nucor expects third-quarter earnings to show modest improvement driven by better sheet steel pricing and strength across automotive and energy markets. However, it continues to see challenges in the construction market.
Nucor, a Zacks Rank #3 (Hold) stock, is seeing strength across end markets such as heavy equipment, automotive, general manufacturing and energy. Earnings are expected to improve sequentially in the third quarter, partly driven by improved performance in the downstream business.
Moreover, Nucor is progressing well with its key projects that are expected to boost its earnings power over the long-term. Construction of its 2,500,000-ton direct reduced iron ( DRI) facility in Louisiana, its largest project, is nearing completion and is expected to come online in the third quarter.
However, Nucor has serious issues to contend with. The steel industry is going through a difficult phase and market fundamentals remains challenging in the U.S. There is not enough demand for steel products due to persistent weakness in construction end markets, resulting in excess supply. Contributing toward this inventory glut are production ramp ups by domestic steel producers and rapid growth in Chinese production.
Nucor, like other steel makers, is plagued by surging domestic steel imports. Consumers in the U.S. are importing cheaper steel from China, forcing domestic steel producers to sell at lower prices. Moreover, the gloomy conditions in the Eurozone are another area of concern for Nucor since it is the largest market for total U.S. exports.
Other Stocks to Consider
Other companies in the steel industry with favorable Zacks Rank are Companhia Siderurgica Nacional ( SID), Shiloh Industries Inc. ( SHLO) and Nippon Steel & Sumitomo Metal Corporation ( NSSMY). All of them hold a Zacks Rank #1 (Strong Buy).